Energy report: Korean tensions may affect crude

Traders across the globe have been combat ready for some time as they staked out their defensive positions to protect themselves from the fall out of the European financial crisis. Now it appears that they have to protect themselves for an entirely different reason. Rising tensions on the Korean Peninsula have Asian stock markets in turmoil causing a flight to the dollar and may overshadow trade in all commodity markets. North Korea is saying they are “combat ready” escalating tensions as South Korea moves to go to the UN Security Council over the sinking of a warship blamed on a North Korean torpedo attack. North Korea responded by making threats. Korea ARIANG TV reported that an academic group of North Korean defectors claim North Korean leader Kim Jong-il has called on the People's Army, all civilian forces and security agencies to prepare for combat in the aftermath of Seoul blaming his regime for the recent naval disaster. Citing sources in the communist country, the Seoul-based North Korea Intellectuals Solidarity says the vice chairman of the National Defense Commission, O Kuk-ryol, broadcast the message immediately following the multinational investigative team's conclusion on the sinking of the South Korean warship Cheonan. Accusing Seoul and Washington of lunacy for linking Pyeongyang to the vessel's explosion as a form of revenge, the senior official reportedly said although Kim does not want war, North Korea is ready to defend it.

That means no one will defend the euro or the oil bulls for that matter. The prospect of war no matter how small in Korea cannot be a good thing for investment or oil demand expectations. China is fearing that a war will send a flood of refugees to their border and in a global marketplace that is already skittish about Europe, this may even further reduce confidence and reduce investment as traders and markets go back into hunker down mode.

Those fears and the flight to the dollar sent oil prices plunging over $2 a barrel overnight. These fears about demand destruction enhance the focus on the supply that for oil products stands at a 20-year high. The factors that have allowed oil and product traders to ignore the ever mounting supply levels are now being stripped away one day at a time opening up the possibility for another deflationary drop that could see oil back into the $40 range.

Now I know I have been talking about this drop to the forties since the beginning of this year and the truth is, while I felt that this was going to happen, it was hard to know when. Oil bears have had to continue to fight the Fed and the lies from Greece as the true nature of their debt. Buyers of the carry trade were sucked into the belief that the euro was somehow a superior currency to the dollar because the EU would never stoop down to having to buy toxic assets and print more euros. We have had to fight the illusion of Chinese oil demand not knowing how much was real and how much was being propped up by government buying to hedge against a falling dollar and buying for their strategic oil reserve. We even had to suffer through a false upside breakout in a holiday light volume market. The truth is that the oil bull market has been a house built out of straw just waiting for someone or something to come and blow it away. Those winds now are getting stronger and everyone, no matter how bullish, had better adjust to these new economic realities.

Speaking of winds, we have our first storm event of the 2010 hurricane season. The National Hurricane Center says that, “1. THE NON-TROPICAL LOW PRESSURE SYSTEM CENTERED BETWEEN BERMUDA ANDTHE BAHAMAS REMAINS DISORGANIZED...AND THE POTENTIAL TO ACQUIRE SUBTROPICAL CHARACTERISTICS DURING THE NEXT DAY OR SO IS DIMINISHING. THERE IS A LOW CHANCE...20 PERCENT...OF THIS SYSTEM BECOMING A SUBTROPICAL CYCLONE DURING THE NEXT 48 HOURS. THIS LOW IS MOVING SLOWLY TOWARD THE NORTH-NORTHWEST AND IS STILL PRODUCING A LARGE AREA OF SHOWERS AND THUNDERSTORMS ALONG WITH GALE FORCE WINDS." Right now it is not a threat but it is a reminder that hurricane season is right around the corner.

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or atpflynn@pfgbest.com

About the Author

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

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